Governments Should Support Entrepreneurs for Industrial Growth-AfDB

The African Development Bank (AfDB) in conjunction with the Development Centre of the Organization for Economic Co-operation and Development (OECD) and the United Nations Development Program (UNDP) have released the African Economic Outlook (AEO) 2017 report at the ongoing African Development Bank Group’s 52^nd Annual Meetings in India.

The report takes a hard look at the role of entrepreneurs in Africa’s industrialization process proposing practical steps that African governments can take to carry out effective industrialization strategies.

For its 16^th edition, AEO 2017 highlights that Africa’s economic growth slowed down to 2.2 percent from 3.4 percent in 2015 due to low commodity prices, weak global recovery and adverse weather conditions, which impacted on agriculture production in some regions. However, it is expected to rebound to 3.4 percent in 2017 and 4.3 percent in 2018.

Further, East Africa was the fastest growing region at 5.3 percent real GDP growth, followed by North Africa at 3 percent. Growth in other regions was anemic, ranging from a low of 0.4 percent in West Africa, dragged down by the recession in Nigeria, to 1.1 percent in Southern Africa, with South Africa, the region’s largest economy, posting only 0.3 percent growth.

“Although economic headwinds experienced in the last two years appear to have altered the ‘Africa rising’ narrative’, we firmly believe the continent remains resilient, with non-resource dependent economies sustaining higher growth for a much longer spell. With dynamic private sectors, entrepreneurial spirit and vast resources, Africa has the potential to grow even faster and more inclusively,” stated Abebe Shimeles, Acting Director, Macroeconomic Policy, Forecasting and Research Department, at the African Development Bank.

In fact, there are promising developments across the continent. Africa’s growth increasingly relies on domestic sources, as shown by dynamic private and government consumption that combined, accounted for 60 percent of the growth in 2016. This growth also coincides with progress in human development: 18 African countries had achieved medium to high levels of human development by 2015. Finally, foreign direct investment, attracted by the continent’s emerging markets and fast urbanization, stood at USD 56.5 billion in 2016 and is projected to reach USD 57 billion in 2017. Such investment has diversified away from the natural resources sector to construction, financial services, manufacturing, transport, electricity, and information and communication technology.

However, progress remains uneven. African governments need to push their agenda for job creation with more ambitious and tailored policies. Despite a decade of progress, 54 percent of the population in 46 African countries are still trapped in poverty across multiple dimensions – health, education and living standards.

“The key to successful development in Africa is to nurture the emerging culture of entrepreneurship, to use the famous words of Hernando De Soto, “el Otro Sendero” (the other path) for development; a path that can unleash high-octane creativity and transform opportunities into phenomenal realisations,” said Abdoulaye Mar Dieye, Regional Director for Africa at the United Nations Development Programme.

26 African countries today have an industrialization strategy in place. But most of these strategies tend to emphasize the role of large manufacturing companies at the expense of entrepreneurs in sectors with the potential for high growth and employment creation, including start-ups and small and medium-sized firms. Businesses with fewer than 20 employees and less than five years’ experience provide the bulk of jobs in Africa’s formal sector. Additionally, the advent of digital technologies and new business models is blurring the boundaries between manufacturing – which is now bouncing back at 11 percent of Africa’s GDP – and the services sector.

To turn the challenge of higher population growth into an opportunity, making Africa’s new industrial revolution successful is paramount. Industrialization in 21st century Africa calls for innovative strategies embracing all the potential of its 54 countries. First, innovative industrialization strategies should go beyond sectoral approaches that target only manufacturing. For instance, Cape Town, Lagos and Nairobi are emerging as hubs for global start-ups, especially in sectors such as financial technology and renewable energies. Africa can industrialize by promoting all economic sectors that have a potential for high growth and employment creation. Second, strategies should include high-potential entrepreneurs. Start-ups and small and medium-sized firms with high-potential can complement the growth of large companies in driving Africa’s industrialization. Industrialization strategies thus need to support other sectors where African economies have a comparative advantage, such as agri-businesses, tradable services, and renewable energy. New strategies need to avoid dependence on businesses that are not environmentally friendly.

“African economies cannot miss out on their next production transformation. Entrepreneurs should be lead actors in Africa’s journey into the fourth industrial revolution,” said Mario Pezzini, Director of the OECD Development Centre and Special Advisor to the OECD Secretary-General on Development.

According to the Outlook, Africa has a high untapped potential for entrepreneurship. In 18 African countries for which statistics are available, 11 percent of the working-age population set up their own firms to tap specific business opportunities. This level is higher than in developing countries in Latin America (8 percent) and in Asia (5 percent). However, few of them invest in high-growth sectors, grow to employ more workers or introduce innovations to markets. To turn their dynamism into an engine of industrialization, African governments can improve the skills of workers enhance the efficiency of business clusters – such as industrial parks and special economic zones – and increase access to finance, with more affordable credit and more innovative instruments, for small and young firms.